Foreigners still shunning dollar-backed assets

NEW YORK (AP) This seems to be a battle the United States hasn't yet won: getting the world to invest here again.

Foreigners continue to show disinterest in U.S. assets like stocks and bonds, with volatile financial markets and continued economic weakness keeping them away.

The problem is we need their money. The United States has become so reliant on foreign investment and borrowing that without those dollars it is going to be difficult to propel growth.

It may be hard to see why global investors wouldn't be attracted to U.S. investments right now, given what is going on in the rest of the world. The SARS virus is crippling Asia and there's been anemic growth through much of Europe.

Still, foreigners aren't rushing back into U.S. assets.

They started pulling back when the bear market began three years ago, and the retreat has only been more pronounced in the last year as anxieties grew over owning U.S. assets.

Like their counterparts in the U.S., foreign investors have been bruised by the plunge in the U.S. stock market over the past few years, and memories of last year's corporate governance scandals may restrain foreign enthusiasm for U.S. stocks,'' John Silvia, chief economist at Wachovia Securities, said in a recent report.

Also problematic has been the lack of compelling corporate investment opportunities here. With the economy's sluggishness lingering, there is little incentive to take on new business projects.

In fact, over the last six quarters, the pace of direct foreign investment in the United States has lagged behind investment in the euro zone, the region representing the 12 nations in the European Union, according to Morgan Stanley.

Low Treasury yields have also curbed foreign interest because better returns are available elsewhere. The U.S. 10-year note yields about 3.9 percent right now, compared with about 12 percent in Brazil, 4.2 percent in Germany and 4.4 percent in England.

But both the government and businesses rely heavily on foreign investment. Thirty-two percent of Treasurys and 23 percent of corporate debt is owned by foreigners, according to The Bond Market Association.

The result of this global pullback can be seen in the dollar, which has fallen in value over the last year against major currencies like the Japanese yen and the euro.

When foreigners aren't making investments here, they don't need to convert their money into U.S. dollars, so that drives the greenback down.

But the dollar's weakness also becomes part of the reason that foreigners don't want to invest here. When the dollar is falling, they lose money when converting the proceeds from the sale of their dollar-denominated investments back to their local currencies.

The lack of capital flowing in from abroad also can hurt the economy.

While U.S. household savings is up, due in large part to the turbulent stock market and uneasiness over the economy, the government's budget deficit is ballooning. That makes foreign money a more crucial component to fueling the economy.

The shortfall between what the United States buys, sells and invests in abroad vs. what is coming into this country is reflected in the current-account deficit. Last year, that deficit hit an all-time high of $503.4 billion and was a record 5.2 percent of total U.S. gross domestic product.

If an emerging market had a current-account deficit of that size, the resulting debt could be disastrous for its economy. But economists say they can't tell how damaging a continued expansion of the deficit could be on the U.S. economy, the largest in the world.

Stephen Roach, chief economist at Morgan Stanley, pointed out in a recent report, that it takes more than $2 billion a day in foreign financing to cover that shortfall, and that is not a stable situation.''

For years, the United States could rely on investments from global economies flush with savings. In recent years, though, those same global economies have seen their average household savings rate shrink from 14 percent in the early 1990s to 2.5 percent today in Japan, for example and their investments in the United States have dwindled.

Now, the United States' dependence on foreign money needs to be reduced, too.

Rachel Beck is the national business columnist for The Associated Press. Write to her at rbeck(at)ap.org